Finance minister Arun Jaitley has given millions of taxpayers a reason to save for their retirement. Up to Rs 50,000 invested in the New Pension System (NPS) can be claimed as a deduction under the new Sec 80CCD (1B). Though the Budget has not altered any feature of the NPS, the additional deduction is a big incentive for investors. A taxpayer in the 30% tax bracket can save up to Rs 15,450 in tax every year.

Financial planners believe that the time has come for investors to open NPS accounts. "Till now, we did not recommend the NPS. But it has now become attractive because of the additional Rs 50,000 tax deduction," said Anil Rego, CEO, Right Horizons. Planners, who were already recommending NPS to their clients, are thrilled by the Budget proposals. "The NPS has become better with one more incentive and we will continue to recommend it," said Suresh Sadagopan, founder, Ladder7 Financial Advisories.

But there are also those who think that one should not be swayed by tax benefits alone. "An additional deduction should not be the only reason to invest in the NPS. Go for it if it suits your risk profile and investment horizon," said financial advisor Surya Bhatia. What Bhatia is hinting at are the investment rules of the NPS that cap the equity allocation to 50% of the corpus.

Younger investors might find this too conservative for their risk profile. There is no reason why the equity component should be restricted to 50% for someone who enters the NPS at 25 and has more than 35 years to retirement.

Financial planners are recommending their clients to opt for the scheme as the additional Rs 50,000 tax deduction is a big incentive for investors.

There is another problem. The 50% allocated to equity is invested in Nifty stocks in the same proportion as their weight in the index. So, investing in the equity fund of the NPS is essentially like investing in an index fund benchmarked to the Nifty. Though this does reduce the risk, it also caps potential returns. If you are investing in the NPS, opt for the maximum 50% exposure to equity. Given that the corpus will be invested in Nifty stocks, there is little reason to worry.

For investors who cannot decide the allocation, the Lifestage Fund is a useful option. Under this, the allocation to equity is defined by the age of the individual. This is the default option to be followed if the investor does not mention the desired asset allocation. However, some experts think this is not a good option because it is too conservative.

"Equity exposure is already capped at 50% and will progressively come down after the age of 35 under this option. It is better to take the active option and keep your equity allocation to around 50% till you turn 50," said Ankur Kapur, director, Investment Advisory, Finqa.

Though the deduction offered under Section 80CCD (1B) is Rs 50,000, it is not advisable to put down the entire amount at one go. It is best to stagger your investments across several months, much like the SIP strategy in a mutual fund. However, don't make too many small contributions. There is a transaction charge of 0.25% or Rs 20 (whichever is higher) on every contribution. If you invest Rs 500-1,000 every month, you pay Rs 20 per contribution, which works out to 2-4%.

The best part is that you are not stuck to one fund for life. Unlike a pension fund or Ulip, investors in the NPS can choose from six pension fund managers and even shift from one to another if they are not happy with the performance or services of their pension fund.

But you are allowed to switch managers just once in a year. You can also invest only through one pension fund manager. The Budget provided a tax benefit on NPS investments but did nothing to address a long-standing problem. Under the current rules, the NPS corpus is taxable at the time of withdrawal.

This needs to be fixed to provide a level-playing field to the NPS. Other retirement options such as PPF and provident fund are tax-free on withdrawal. Even insurance policies give tax-free income under Sec 10 (10d). The other problem is that of compulsory annuities. Up to 40% of the corpus must be used to buy an annuity that gives monthly income to the investor. This is a big discouraging factor for investors.